Pricing & Promoting Rooms for
Maximum Income

Eric Goldreyer

The
problem: Most
inns run at annualized occupancy rates of around 43%1,
making it hard to generate the profits needed to hire the staff
required to prevent burnout and complete other projects that will
improve income. While conventional wisdom recommends spending 5% of
gross revenues to market an established property and 10-15% for a
new or turn-around business, that’s hard to do when your credit line
is maxed out.

The trends: David Hiler, of
Oates & Bredfeldt inn consultants, compared his
company’s cost studies for 2002 and 2004, and explained: “In both
our B&B and Full Service Inn studies, which each analyze over forty
well-operated properties, the average number of rooms and average
daily room rate increased from 2002, while the occupancy rates
decreased. Sales also increased, but net income was down. In other
words, the inns we studied are getting bigger and better, but they
are leaving more rooms nights unsold. In addition, the stronger
demand for services and amenities is cutting into the bottom line.
The good news is that the B&B industry’s visibility in the national
marketplace continues to rise. Now, the challenge is for innkeepers
to find creative solutions to fill up those extra room nights.“

The
solutions: Take
advantage of marketing solutions and distribution channels that cost
you money only when the reservation has been made, and spend
strategically on marketing and amenities that will drive revenue.
Consider these three parallel strategies:

Value-added
Packaging

Flexible
Pricing via Yield Management

Pay-to-play
Marketing vs. Pay-if-they-stay Marketing

Value-added Packaging

When
David Hiler (mentioned above) was the innkeeper of the Three
Mountain Inn in Jamaica, VT, he offered a winter midweek “Ski Free”
package with nearby Stratton Mountain Ski Area. “This money-saving
value-added package was included in the “Deals and Discounts” column
of the New York Times Travel Section, with great
results. Although we nervously expected a plague of bargain hunters,
most of the guests were delightful. Best of all, many returned to
the inn many times thereafter, often at full price.”

Value-added packages will cost you money in reduced revenues—but the
costs are incurred only after you’ve taken the reservation.
In the example above, the inn had to pay for those “free ski passes”
but it was more than compensated by the midweek reservations
generated by the promotion. When creating a package, remember that
the consumer needs to perceive real value; you have to
actively promote it through prominent place on your
website and in email newsletters, via the special packages and Hot
Deals on BedandBreakfast.com, through media press releases, and to
your past guests.

Develop an inventory of value-added packages that you can promote to
your mailing list, on your website, on directories like
BedandBreakfast.com, and to the media. Packages should be varied and
seasonally appropriate. Don’t be afraid to experiment; you never
know what will succeed and what will bomb.

Flexible Pricing via Yield Management

Establish your
direct costs when renting a room:One
innkeeper said: "I keep my rates the same every day, year-round.
After all, my costs are the same, so why shouldn't my rates be as
well?" If you are happy with your occupancy rates, then never
change your rates. Most innkeepers, however, realize that a
room-night is a perishable commodity. The unrealized revenue from an
unsold room can never be recaptured, so it’s important to adjust
rates to meet the supply and demand of the market.

Start
by estimating your direct cost to rent a room, including such
variable costs as utilities, housekeeping and other staff, food,
wear and tear on furnishings and linens (soft goods), and so on. Do
not include indirect costs like your mortgage, real estate taxes,
and insurance that are the same whether a room is vacant or rented.
Add in the marketing cost that you’ll need to pay in commissions or
advertising to rent the room, and you have a good idea of what’s the
lowest price you want to charge when most of your rooms are vacant.
The price should be tempting to consumers, competitive with other
area properties, but not so low that potential guests are either
scared off, or you end up attracting guests who don’t respect your
B&B.

For
example, let’s say your direct cost is $50, and your regular rate is
$200. If you sell the room for $150, and pay a commission of
$37.50, you still have a profit of $62.50, giving you a reasonable
return on investment (ROI). In addition, you’ve acquired a new
customer, who is likely to generate additional income via repeat and
referral business. Roughly 20%2
of guests produce repeat/referral reservations; for empty rooms, the
number is zero percent.

Here’s how yield management can work for B&Bs: Will
Dewey, long-time innkeeper at the luxurious Francis Malbone House in
Newport, RI, explained how it works for them: “Although our peak
season rates start at $245, we offer the same room mid-week
off-season for $99. Our off-season guests are thrilled to be able
to afford an inn of our caliber, and their stays result in higher
occupancies at all times of the year through repeat and referral
business.”

David Hiler
suggests: “Each innkeeper must decide what to do and when to do it.
Spring mud season in Vermont inn is really slow, so there may be no
point in a big sales push to sell a few rooms at low rates. On the
other hand, if it’s early September and you’ve got a soft spot in an
otherwise busy time, why not make a big push to book additional
rooms, even at a lower return? After all, it’s a beautiful time of
year, your staff is on board, and you’re gearing up for foliage.”

Take a look at your
“price-spreads:” The difference
between a property’s lowest and highest rates is called the
“price-spread,” and is generally in the three-to-one price range. In
other words, if a hotel has a peak season rate of $299, it might
have rooms at $199 in the shoulder season, and $99 in off-season.
Sharp peaks and valleys are common in resort areas, while cities
that attract a balance of business and leisure travelers might use a
price-spread ratio of two-to-one. If the rates at your B&B are not
more or less in line with nearby hotels following 3-to-1
price-spreads, you may feel the pinch in your occupancies.

Deciding factors in
consumer travel:
Price, location, and property attributes have long been the deciding
factors for travelers. Of these three, price is the most important
and the easiest to adjust. Although aggressive pricing can make the
difference between full rooms and empty ones, it’s a mistake to make
price the only factor. If weekends are your busy time, drop
midweek rates enough to reasonably change consumer behavior.
Monitor the pricing of your competitors so that you don’t drop rates
lower than effective or necessary. Rather than trying to create
demand solely by low rates, build value by adding amenities, ramping
up marketing efforts that will drive midweek business, and
organizing packages. Keep a careful eye on the bottom line when
adding amenities. There’s little reason to add in-room telephones if
your area has good cell phone reception, while free in-room Wi-Fi
access is a big plus at a modest cost. Setting up a small butler’s
pantry where guests can enjoy round-the-clock access to coffee, tea,
water, and soda creates a wonderful atmosphere of generous
hospitality in contrast to the endless nickel-and-diming of many
hotels. Sometimes little touches make the biggest impressions: if
your property is located near the beach, supply guest rooms with a
logo’d canvas bag, packed with towels, bottled water, and
sunscreen. You can also sell this “beach-in-a-bag,” package it as a
value-add item, or present it as a gift to returning guests.
Adding your name, logo, and URL to the bags, towels, and even the
water bottles will advertise your inn to many other beach-goers.

How do the “big
guys” do yield management? The process of
forecasting supply and demand and adjusting pricing strategies
accordingly is called yield management; it’s been very successful
for both airlines and hotels.3
Prices are adjusted downward when demand is low and availability is
high, and are raised when the reverse occurs. In addition, minimum
stays are added to maximize duration as well as price during peak
periods.

You can see this in
practice on the
Southwest Airlines website; up to five different fares
may be offered, allowing consumers to choose the price, timing, and
flexibility they need. Similarly, most Las Vegas hotels use yield
management software to tweak room rates on a daily basis. Amazon.com
follows a similar principle when they offer customers a range of
shipping options; if you want your purchase tomorrow, you pay a
premium; if you’re not in a rush, free shipping is offered.
Although large hotels use specially designed software to track and
impose pricing, B&Bs can usually stay on top of booking trends by
studying past reservation behavior and responding to current market
needs. Property/guest management software is helpful in studying
occupancy trends but is not essential.

High occupancy
rates:
The golden rule of yield management for hotels is that an
annual occupancy rate of 85% is the optimal level; for
owner-operated B&Bs with minimal staff, the figure may be closer to
60%. If you’re running at higher than 90-100% occupancy during peak
periods, you should give serious thought to raising rates
and/or adding/extending minimum stay requirements. Most
experts agree that long-term high occupancies are not worth the wear
and tear on you, your inn, and your staff; a slight increase in
rates usually results in a slight decrease in occupancy, giving you
the same income with slightly fewer guests. Although two-night
weekend minimum stays are common for advance reservations at most
B&Bs, consider extending them to midweek stays as well.
Alternatively, ask for three- or even four-night minimums if demand
warrants. Since B&Bs tend to be minimally staffed, increasing
stayovers minimizes innkeeper stress while preserving income.

Low occupancy
rates:
For most properties, occupancies are lower midweek; certain months
are worse than others. During off-peak periods, competition
increases as demands slows; the Internet makes it easy to monitor
prices being charged by area lodgings, so make the time each week to
see what the market will bear. Many moderately priced motels now
offer convenient buffet breakfasts and free Internet access, plus
reasonably comfortable accommodations at competitive prices. Book a
night at one and see how your inn compares, both positively and
negatively, then respond with appropriate action. If you want those
wonderful midweek low-maintenance business guests, you must
have at least one guest room with in-room high speed Internet access
(sorry, dial-up is no longer adequate in most locations), a usable
desk or table, in-room TV, and flexible breakfast, check-in/out, and
cancellation policies. Further enhance low and medium occupancy
periods with special offerings and amenities for families, pet
owners, and those looking for a four-night mini-vacation.

Experiment with
promotional rates, both on your own website as well as other sites
that drive significant traffic to your own. Take advantage of
programs like BedandBreakfast.com Online Reservations and
BedandBreakfast.com Hot Deals that give potential guests strong
reasons – both in terms of convenience and price – to book
your B&B. If most of your guests come on weekends, try
different ways of “growing” the weekend by offering a 50% discount
for Thursday and/or Sunday night stays. If your inn is about two
hours from a major city, give folks the option of a Monday
“breakfast-to-go,” (don’t forget logo car coffee mugs as a gift) so
they can still be back at their desks before lunch. Give your
weekend guests transferable gift certificates for $50, good for a
two-night stay during off-peak periods. Build your own mailing list
of past and potential guests, and spread the word when you’re
offering special deals. There’s no “magic feather” (or, as computer
folks say, no “killer app”); you’ll need to keep trying different
strategies to see which programs work best for you.

Pay-to-play marketing vs. Pay-if-they-stay Marketing

In general, there
are two ways of marketing your property, pay-to-play
and pay-if-they-stay. In the former, you pay in
advance for advertising and promotion via your chamber of commerce,
online directories, websites, brochures, etc., in the hopes that
potential guests will learn about your B&B and make a reservation.
Pay-per-click (PPC) marketing is a refinement of that concept, in
that you incur a cost only when someone visits your website;
nevertheless, a website visit is not a confirmed reservation.
However you drive traffic to your website, the cost is fairly low,
because the number that converts into reservations may be
approximately one in 50-100 site visitors for a well-designed
site. In pay-if-they-stay programs, you have
minimal upfront marketing costs, but do pay a commission when you
actually get a reservation. Use these programs for dates when you
are unlikely to sell the rooms yourself; set a “lowest available”
rate that covers the commission and your direct costs, and the
profit falls right to your bottom line.

For example,
BedandBreakfast.com Online Reservations are an ideal way to
generate bookings for dates that you’re not selling directly.
Although the 25% commission is significant, it’s better to have 75%
of some revenue than 100% of nothing at all. Returning to our
earlier example above, if your direct costs are $50 per room, and
your regular rate is $200, consider posting inventory for rooms
you’re unlikely to sell yourself at $150 a night. You’ll have $50
to cover your direct costs, $62.50 in profit you would not have seen
otherwise, and will pay a commission of $37.50 to
BedandBreakfast.com.

Because it takes
just minutes to add or delete inventory and adjust pricing, you can
easily adjust your inventory for maximum results. For example, if
you know from your booking patterns that certain dates are high
demand, set your rates high and impose minimum stays of 2-3 days; if
you know that others are low demand, cut your rates and eliminate
minimums. Similarly, allocate rooms to the online reservations
program for those low-demand days. In addition, manually factor in
demand and availability criteria as specific dates approach. For
example, you wouldn’t allocate inventory to the online reservations
system for a peak weekend two months in advance, but as the date
gets closer and you still have rooms free, adding a room or two to
the system makes sense.

Test and
evaluate the ideas here, come up with more of your own, and give
them a try; while there are no guarantees, you have an excellent
opportunity to improve your occupancy and revenue.

1PAII
Industry Study, 2002, reported occupancy rates averaging
43%.

2 PAII
Industry Study, 2002, reported returning guests at 13%,
referrals at 7% from former guests, 5% from family/friends
of local residents.

3Although
it’s easy to blame the financial woes of many airlines on
yield management, the real reasons are high fixed labor and
pension costs among legacy carriers, over-capacity on many
routes, and a variety of reasons that make it hard to pass
along increased fuel costs to consumers. For more
information on yield management, read these articles:

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